HEALTH-SYSTEM EDITION
BUSINESS/MANAGEMENT

Government challenging GPOs as money savers

This is a tough time for group purchasing organizations (GPOs). The government is challenging their claim that they save hospitals money. A recent series of articles in the New York Times alleges that some GPOs have engaged in questionable business practices. Other critics claim that the business model that GPOs operate under is just plain wrongheaded. Despite the bad publicity, GPOs are holding steadfast to their position that they represent an asset to hospitals.

For most health-system pharmacy managers, GPOs are an integral part of doing business. However, some believe that the recent intense scrutiny that GPOs are undergoing could change the nature of how they operate in the future.

The entire industry was thrust into the limelight in April when a Senate Judiciary Subcommittee on Antitrust, Competition, and Business and Consumer Rights heard evidence from the General Accounting Office (GAO) that GPOs don't always offer the best return on investment for their hospital customers. In fact, an initial GAO pilot study claims that, in some cases, hospitals—especially larger facilities—do a better job of negotiating prices on their own. Facilities with more than 500 beds often obtained lower prices on their own, while small and medium-sized hospitals were likely to do better using a GPO. Also, whether hospitals using GPO contracts get better prices than hospitals doing their own contracting varies widely by product model.

The Senate antitrust panel also heard testimony that GPO purchasing schemes can lead to artificial barriers in the hospital supply market that stifle improvements in healthcare delivery and do harm to the economy. Many GPOs finance their operations primarily through the administrative fees paid by manufacturers and other vendors. These fees are typically calculated as a percentage of each hospital's purchases from a vendor. The allegations raised questions among industry observers about the potential conflict of interest that exists between GPOs and their various suppliers as well as about the tremendous marketing clout that the top-tier GPOs wield in the healthcare arena. The nation's two largest GPOs, California-based Premier and Texas-based Novation, distribute medical supplies and pharmaceuticals to almost two-thirds of America's hospitals.

GPO executives fought the charges. In his testimony before a Senate subcommittee, Novation president Mark McKenna said his company follows a public competitive bid process to award contracts. Contracting decisions are made based on clinical input throughout the process.

Jody Hatcher, v.p. of Novation, said that group purchasing through Novation contracts brings tremendous value. That said, he acknowledged, however, that on any given day it is possible that a large hospital can get a better price than the Novation contract price for a particular product. "It is dependent upon the product, the vendor, and a variety of other factors. The real question is, 'Can they get better pricing across the board, and can they sustain that?'" Hatcher pointed out that the cost of administering and maintaining multiple contracts alone can be very expensive for a health system. "These are all important questions a health system should explore when deciding if using a group purchasing organization is a good fit for them or not," he said.

Hospital pharmacists, even those who have long-standing relationships with GPOs, assert that buying groups aren't necessarily the best way to go. William Gouveia, director of pharmacy at the New England Medical Center in Boston, a Novation partner, said that there is reasonable evidence that hospitals, especially large institutions, can negotiate better prices directly with vendors. He conceded that the goal for a hospital is to get the best deal. "I need a good, consistent, constant supply in the packaging I need at the lowest possible price," he said. If the price is attainable via a GPO, then that's the way a hospital should go. If it has the resources and manpower to do it on its own, then that's the direction it should move in, he said.

For many hospitals, GPOs are the preferred route. "I don't think I could do as well as a GPO," said James Jorgenson, director of pharmacy at University of Utah Hospital in Salt Lake City. He said that while he believes the current probe into the industry will shed some light on how GPOs actually function and result in more clarity, he predicted that they wouldn't be going out of business any time soon.

Just weeks before the Senate subcommittee hearings, a national survey was released revealing that GPOs could indeed strengthen a hospital's evaluation of the clinical value and effectiveness of medical products and supplies. The Health Industry Group Purchasing Association (HIGPA) commissioned The Lewin Group to conduct the survey, entitled, "The Clinical Review Process." Data from the survey showed that GPOs and health systems conduct extensive and rigorous clinical reviews when deciding which healthcare technologies will be listed in purchasing contracts and made available for use.

Novation's Hatcher commented that "obviously, each GPO operates differently, so levels of involvement and approaches vary, but attention to clinical input remains a high priority for all.

David McDonough, director of communications for HIGPA, commented that the intent of the survey was to address questions about exactly how GPOs and their health-system members evaluate products. "There was some anecdotal evidence and conventional wisdom within the industry that of course GPOs provide extensive pathways for clinical review. We were striving to get an authoritative look at the issues," he said.

Meanwhile, the Senate subcommittee has suggested that a panel of experts be established with the goal of developing industry guidelines on GPOs.

"We believe that developing these industry guidelines will have a positive impact on America's hospitals, and therefore we are fully supportive and will cooperate 100% in their development," noted Hatcher. He added that it's premature to say how the guidelines may affect Novation's business model. "But I don't believe that our structure will change."

Anthony Vecchione